IT Sector Q2 Results Preview - Recovery In Progress: HDFC Securities

HDFC Securities Institutional Equities

The IT sector growth is in the middle of its recovery, having bottomed out two quarters ago, and is expected to achieve a high single-digit over the next three quarters. Current stock prices reflect increased confidence in this trajectory.

AI is proving to be a net positive for the sector, and with GCC growth differential peaking, concerns around terminal growth are easing, supporting sustained demand. Despite the absence of mega deals recently, some improvements in decision cycles and discretionary can support growth even as the fabric of cost optimisation remains.

High-frequency indicators suggest a slight uptick in tech hiring and job postings in the U.S. Moreover, enterprise client revenue trends for CY25E look promising compared to CY24, particularly in verticals such as healthcare, manufacturing and Hi-Tech.

Current estimates build in profit pool expansion of >35% from FY24-27E, similar to the growth seen between FY20-24.

The base case of growth normalisation in H2 FY25E and subsequent recovery holds. However, the sharp valuation rerating limits the ‘near-term’ absolute upside. Among tier-1 IT stocks, we prefer TCS.

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